When shareholders in Facebook owner Meta (NASDAQ: FB) look at recent moves in the share price, few will ‘like’ it. The shares have plummeted 39% this year. Over the past 12 months, they are down 23%.
Here is what I think is going on – and how I plan to react.
Meta and value destruction
Such a big fall is not just a reflection of investor nervousness about US tech stock valuations in general. It reflects some very specific concerns about Meta.
In its fourth-quarter results statement, the company announced that revenue was 20% higher than in the same period a year before. But there was a lot of bad news too. Net income, operating profit margins, and diluted earnings per share all fell. There was even more bad news in the company’s outlook. It expects continued challenges from competition. Not only does that involve users preferring platforms from other companies, it also includes the company’s own users shifting to less lucrative parts of its app ecosystem such as videos. The company also warned that it could be hit by declining ad spend, a shift in advertising policies at Apple, and exchange rates.
That is a significant set of challenges that threaten to hurt Meta’s business model both now and in the future. The massive value destruction seen in Meta’s market capitalisation since the announcement reflects investor worries that Meta could struggle to grow profits at an attractive rate in future.
A bull case for the Meta share price
From a contrarian perspective, the sort of crash we have seen in the Meta share price over the past few weeks could look like a buying opportunity. After all, the company posted healthy revenue growth. It has a huge installed user base, which gives it a strong competitive advantage. Although net income fell, it still topped $10bn in a single quarter. For the year, net income grew 35% to $39bn.
The company is now trading at a price-to earnings ratio of 15. For a tech company like Meta with its unique assets, I think that valuation looks low.
Multiple challenges
Despite the fall in the Meta share price, I am not sure it is a bargain for my portfolio.
At the current level, the shares are basically just back to the price at which they traded a couple of years ago at the start of the pandemic. In that time, the Facebook business model has shown some of its strengths – but also mounting problems. The challenge of keeping users engaged is becoming harder as competitors evolve.
The number of monthly active users on the Facebook platform in December grew by just 4% compared to one year before. That suggests that the company’s days of rapid growth are behind it. That might not be problematic for Meta if it engages its existing user base and maintains advertising rates. But in an increasingly crowded digital space, I think it may struggle to do that at the sorts of levels that could justify its previous valuation.
Due to its massive user base and attractive price-to-earnings ratio, I have been considering adding Meta to my portfolio after its share price crash. But I reckon other tech companies have a more promising outlooks, with fewer competitive challenges. So I will not be acting on the Meta share price fall.